Appraisal Regulations Hurt Consumers More than Help
On May 1st this year, the Federal Housing Finance Agency implemented the Home Valuation Code of Conduct (HVCC) as a result of a lawsuit filed by New York’s Attorney General, Andrew Cuomo, against former lending giant Washington Mutual. While the initial aim of this legislation was to attempt to protect consumers, the result has hurt more than it’s helped.
Prior to May 1st, lenders had the ability to select the appraiser for a particular property based on the appraiser’s good credentials, knowledge of the market area and the fee s/he would charge the borrower. The lender could agree to cover the cost of the appraisal for the customer as part of their service to the customer. The turnaround time for a typical appraisal was 3-4 days and, if the appraisal order was placed with an appraiser that could not meet the turn-time request, the order could be withdrawn and placed with another qualified appraiser. Most importantly, if the borrower was seeking a refinance, the lender could call the appraiser to discuss the possible value of the property prior to placing the order and, in doing so, could help the borrower avoid the expense of an appraisal if the value would not support the new loan requested.
Now, as a result of the new regulations, a lender can have no involvement in the placement of appraisal orders. They are required to be placed through a third-party. The lender doesn’t get to select the appraiser based on his/her knowledge and experience. The appraisal is ‘assigned’ to an appraiser by the third-party which charges a fee for the ‘placement’ of the appraisal and then ‘assigns’ that appraisal order to whomever they choose. This frequently results in appraisers being sent to do appraisal in areas they are not familiar with, fees to the borrower that are substantially higher often as much as $200 or more, and much longer turn around times which can put a borrower’s contract in jeapordy if it is a purchase with a set timeframe to close.
With a refinance, being unable to speak to the appraiser prior to placing the order to get any idea of value means the borrower must spend $450 or more for an appraisal that may or may not support the loan s/he is requesting. The borrower, often considering refinancing as a means to alleviate some other financial challenge, would have then spent a considerable amount of money for no benefit if his/her property did not appraise.
While I don’t dispute there were unethical practices by many lenders and appraisers alike which have contributed to the housing/mortgage crisis, a more reasonable response to this issue would be to pass legislation that would prevent the inheirent ‘conflict of interest’ that arises when a mortgage lender or broker also owns a realty firm, a title agency and an appraisal company. These kinds of incestuous relationships, which still exist, but were even more prevelant during the housing boom as one company and/or individual tried to control and financially benefit from all parts of a real estate and mortgage transaction. This led to many abuses. Again, the simpler correction would be to make it unlawful for the same company and/or individual to have ownership in more than one ’servicer’ to an individual residential real estate transaction.